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January 27, 2009

In Wake of Nicholas Cosmo Scandal, Financial Expert Urges Caution on Who Should Invest Your Money for You

No sooner had the fallout from the Madoff scandal leveled off than another Ponzi scheme has been discovered. Nicholas Cosmo, chief of Agape World, was arrested on January 26 after allegedly defrauding 1,500 investors out of $370 million.

Paul Woldar, President and Founder of Legacy Financial Management, said one can never be too careful in choosing the proper money manager. Like Mr. Madoff, Mr. Cosmo allegedly promised huge returns on investments, but most of the money went to himself and his associates. Bloomberg News reported he invested $100 million in commodities trading, losing at least $80 million of it, and paid his recruiters $55 million. According to the Associated Press, Mr. Cosmo allegedly told investors the money was being used for bridge loans for businesses, but less than $10 million was loaned out.

Usually, the best way to tell an honest investment manager from a dishonest one is through word of mouth, but recently, that has not been the case, says Mr. Woldar. If a potential asset manager makes claims of huge returns — similar to those made by Mr. Madoff and Mr. Cosmo — then investors should ask how their money could earn returns higher than market levels. If the manager cannot sufficiently explain this, then a red flag should go up.

Mr. Woldar urges investors that, before placing any money into investments, they should ask how easy it is to liquidate their holdings. If there are significant restrictions or long waiting periods, investors should be aware of this going in and, all the more important to know how you are invested since you will not be able to access those funds quickly.

The two most important things to look for in an investment manager, Mr. Woldar says, are patience and understanding — patience to take the time to make an investor understand how this works and why this investment vehicle or process makes sense, and the understanding to answer the investor’s questions easily. Since this is the person to whom they will entrust to invest their money, there should be no unanswered questions. When parting company, the investor should be comfortable enough to explain its value to another person.

Most importantly, Mr. Woldar suggests having someone else with a greater investment background view any options the investor is considering, whether it be an adult child, an investment-savvy friend, a spouse, a sibling, or another money manager that the investor might consider using.


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